Which of the following explains the effect of prices on profits in the short-run?
A)The direct relationship between aggregate quantity demanded and national output.
B)The direct relationship between aggregate quantity supplied and the price level.
C)The inverse relationship between aggregate quantity demanded and national output.
D)The inverse relationship between aggregate quantity supplied and profits.
E)The inverse relationship between aggregate quantity supplied and national output.

Question

Quizplus · Accepted Answer

In the short-run, as the price level increases, the aggregate quantity supplied by firms also increases due to the profit motive. This leads to an increase in profits for firms. Conversely, a decrease in the price level leads to a decrease in aggregate quantity supplied and consequently, lower profits in the short-run.

Which of the Following Explains the Effect of Prices on Profits